US cracks down on digital fraud, biggest money laundering scheme 'in history'

US cracks down on digital fraud, biggest money laundering scheme 'in history'

Summary: Liberty Reserve is in hot water with federal agents after allegedly laundering money worldwide.

TOPICS: Government US
liberty reserve six billion money laundering scheme digital currency

Federal agencies are in the midst of prosecuting Liberty Reserve, claiming that the firm ran a $6 billion money laundering scheme.

The U.S. Justice Department says that Costa Rica-based digital currency firm Liberty Reserve and seven of its principals and employees are being charged for running the "largest" ever money laundering scheme, raking in at least $6 billion by "operating an unlicensed money transmitting business" and giving its users the ability to commit crime in secret.

The firm has been branded the "financial hub of the cyber-crime world" by prosecutors. Liberty Reserve, which handles vast amounts of money outside of governmental regulation, allegedly facilitated at least 55 million illegal transactions for a minimum of one million users, 200,000 of which residing in the United States. Operating in 17 countries, law enforcement says that the company allowed "global crime conduct," and subsequent charges are believed to become "the largest money laundering prosecution in history."

Liberty Reserve is accused of laundering the proceeds of crime including credit card fraud, identity theft, investment fraud, computer hacking, child pornography, and narcotics trafficking.

Established in 2009, Liberty Reserve operated using a digital currency called "LR." A user was able to open an account without validation, and so users often created accounts under false names. As part of the investigation, one agent opened a blatantly fake account, using "Joe Bogus" and the address "123 Fake Main Street” in "Completely Made Up City, New York" to test the system, only to find there was no verification.

Once an account was open, a user could use LR to trade with other members of Liberty Reserve, receiving, transferring, or sending LR to "merchants" that accepted LR as payment. The money exchange company charged a transfer fee each time. To ensure anonymity, Liberty Reserve offered users the option to pay more to hide account numbers, and also required users to make deposits or withdrawals through disguising third-party "exchangers" rather than transferring directly from bank accounts.

The company never registered with the U.S. Department of the Treasury as a money transmitting business, as required by law.

Five defendants were arrested on May 24, 2013, including founder and co-founder Arthur Budovsky and Vladmir Kats. A manager, accountant, and designer of technological infrastructure were also arrested. The members of Liberty Reserve were tracked down in the U.S., Spain, and Costa Rica. Russian citizen Maxim Chukharev is set to be extradited to the United States.

Two other defendants are in Costa Rica and have not been apprehended.

In addition to the arrests, law enforcement has also seized a number of domain names, 45 bank accounts, and a civil action lawsuit has been filed against 35 exchanger websites used to facilitate the company's scheme.

Manhattan U.S. Attorney Preet Bharara said:

"As alleged, the only liberty that Liberty Reserve gave many of its users was the freedom to commit crimes — the coin of its realm was anonymity, and it became a popular hub for fraudsters, hackers, and traffickers. The global enforcement action we announce today is an important step towards reining in the 'Wild West' of illicit Internet banking. As crime goes increasingly global, the long arm of the law has to get even longer, and in this case, it encircled the earth."

Topic: Government US

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  • these guys are small fry

    the biggest money laundering scheme in history is HSBC, which makes these guys look like microbes by comparison. But then, they were too big to jail.

    as for how Liberty Reserve operated, how is that fundamentally different than PayPal? not to defend people who profit from extortion, hacking, kidding porn, etc, but still.... aside from not registering with the authorities, was LR really that different?

    finally: your account registration requirements suck. tried to use twitter, still had to fill out a form and verify via email. what is this, 2005? no wonder I'm the only person commenting here.
    • I don't think I'd mind being a juror on this case

      It looks like this is really an anonymous payment service; appealing by definition to money launderers and others with some need to keep their financial transactions secret, but also useful to those who simply don't trust their governments.

      The question really is, were they really involved in money laundering (on purpose) and was what they were doing really illegal?
      John L. Ries
    • When One Door Closes...

      Another opens.

      Obviously the World now needs a cyber-credentials provider. Legitimate physical and email addresses For Sale.

      How did these guys get caught? If they were transferring money between a million people, how did "Law Enforcement" follow the money trail to the persons operating Liberty Reserve?

      How will the US Attorney explain this to a jury in a way they will understand when most people are struggling the instructions for their TV's remote control? Or will they just classify them Money Laundering Terrorists under NDAA with no rights to due process?

      Did the US Government use the NSA's Cyber-Surveillance project to monitor Liberty Reserve's activities? Do you think it's possible they violated the Privacy Act of 1974, 5 U.S.C. § 552a by illegally intercepting electronic communications of US citizens? Would our Government break the law to enforce a law?

      Did the US Government have actual probable cause to get a legitimate Title III wiretap warrant? How would they acquire such evidence?

      Did they illegally invoke the questionable US Patriot Act? That seems more like the Governments du jour method. Given the Governments history of stretching the law to fit their use while trampling the 4th Amendment rights of its citizens these laws are written to protect, who will be the real criminals in this case?

      Let's weigh that out. On one hand we have hardened criminals that did not verify customer addresses. On the other hand we have Government Bullies trampling citizen's Constitutional rights.

      Will the US Government provide a defense attorney with all the discovery necessary to ensure no laws were violated even though in doing so they would have to reveal their investigative techniques?

      This case began in 2009. Four years of documentation. One mistake and the defendants go free.

      This is going to be a fun case to follow.
  • Bitcoin

    This case was mentioned on NPR, and I could have sworn I heard the word "bitcoin". Did anyone else hear that?

    What exactly is the difference between an LR and a bitcoin?
    • LR Used Bitcoin Technology

      Bitcoin is digital or virtual currency. A small encrypted message (33 alphanumeric characters) generated by a very complex cryptographic algorithm which is improbable to reverse. Improbable because of the amount of computational power to reverse would take a very long time with the most powerful computers available.

      The value of a bitcoin is very complex and is based on theory and trust of that theory, similar to the global economy. There is no concrete definition. It's conceptual rather than tangible. There are many variables known and some that remain unknown.

      Bitcoins can be transmitted point to point or stored in a "virtual wallet" which means in any type of digital storage device.

      The value of a Bitcoin fluctuates similar to a commodity with a lot of volatility. Nobody can say with any certainty if Bitcoins are a scam or legitimate. Currently the value of a Bitcoin is determined by its legitimacy. As it becomes accepted a legitimate form of currency, its value increases.

      The currency of a country is regulated by the issuing country. The value is determined by the stability of issuing country's economy. Bitcoins are not regulated.

      Their value can be compared to rare collectables, gems, and minerals such as silver and gold. Diamonds retain value only because they currently cannot be manufactured, counterfeited, and a diamond's characteristics (e.g. color clarity) cannot be altered.

      Rubies lost value when it was discovered that a low grade ruby could heat treated improving color, and defects (e.g cracks, inclusions) could be repaired.

      Most anything that is rare can have value. The value of collectables is heavily influenced by the global economy.

      Bitcoins are created at a rate of about 2.5 per minute. As time goes on it takes longer to create a Bitcoin. Approximately every four years the time to produce will double until 2040 when Bitcoins will max out at 21 Million.

      Bitcoins value is based on the amount of trust in the bitcoin system's ability to prevent counterfeiting and the trust earned by the outlets that exchange bitcoins for other currency and their ability to verify authenticity.

      Bitcoins are not considered legal tender. The legality of its use has not been established.

      This case here is a major test. If you like to gamble now is an exciting time to bet. The US Government seized the largest Biotcoin exchange outlet, Mt.Gox on May 15th. It is unclear what this means. I highly doubt the US Government has the ability to seize the Bitcoin assets. Mt. Gox had to have seen this coming and shold have been prepared.

      to be continued...
    • Bitcoins Continued, Law and Effect, It's a Mad Mad Mad World

      The reason I believe this is a test is due to the international legal aspect. This is 100% my own opinion and based on solely on my interpretation.

      Rather than continually interject the phrase "in my opinion", I will write the following as factual.

      Even the above description in my previous post is my own interpretation. I am not knowledgeable on the technical details but I do not believe that is necessary to grasp the concept. That is where the trust comes in. I do believe what the creators of Bitcoins claim, is probable, given today's technology. It's in their best interest if it is true and there are no flaws in the system.

      I think the viability and therefore value right now depends on whether the exchange outlets will be ruled legal or not. I do not believe any government has the ability to stop Bitcoins. Just as they are not able to stop the flow of "illegal" drugs.

      The value of a kilo of cocaine or heroin depends on many factors, especially supply and demand, laws, and the ability and effort put forth to enforce those laws in the country where the exchange of the drugs and currency takes place.

      Governments are inherently stupid. If they were not, they would not do so many stupid things.

      According to the news stories, the US has had one man detained in Spain, one in Russia, and ? (a couple or a few) in the US. Two guys the US would like to get their hands on are safely in Costa Rica. The guy in Spain was at the airport with a ticket to Costa Rica.

      Bitcoins fall under international law. The US DoJ has a tenancy to think they can do what ever they want. DoJ is the type of organization when they are given an inch they will try to stretch it a mile.

      The good news is the courts understand this and most judges, the ones that hold the constitution near and dear, do not like the DoJ. Then there are the judges that like to play God, screw the constitution, and make decisions based on their own personal agenda.

      It was US Homeland Security (DHS) that seized Bitcoin exchange MT. Gox. Mt. Gox is the largest international Bitcoin trader.

      The warrant issued was based on Department of Treasury’s Financial Crimes Enforcement Network (FinCen) rules regarding a FinCen requirement that a business involved in the exchange of currency must register with the US Dept. of Treasury.

      Bitcoin is a decentralized international form of currency. It will be up to US courts if Bitcoin trading is illegal or not in the US and whether the US Treasury has the right to regulate Bitcoin exchange merchants.

      The use of DHS to seize Mt. Gox is reason for concern.

      DHS is essentially an army established by a US underbelly faction I refer to as the Greedy Bastards (GB).

      The GB has used their political influence to widen the gap between the rich and the poor by robbing the poor and giving to the rich. GB is responsible for the Banking Fiasco that caused the last recession where the GB Banks brazenly robbed US citizens.

      I recognize the GB to have first surfaced at the Chicago Democratic Convention in 1944. This is when they replaced Truman as Roosevelt's VP at this convention. Had Henry Wallace remained Roosevelt's VP as the reigning VP and the overwhelming choice of majority Democratic voters, Bitcoins would be welcomed as the innovative currency it is. Bitcoins would greatly reduce the costs of trade by eliminating the GB's banking fees.

      Bitcoins are a threat to the GB's monetary control. That is why we see DHS (i.e. GB Army) being called upon to seize the threat.

      In order for the DoJ to surveil the electronic communication of Bitcoin activity they very likely invoked the unconstitutional US Patriot Act. The two key US Government players FinCen and DHS were given unconstitutional powers. The Patriot Act affected the Bitcoin relevant Electronic Communications Privacy Act (ECPA), Money Laundering Control Act (MLCA ), and Bank Secrecy Act.

      Bitcoin activity was monitored unconstitutionally under the guise of the ECPA and the Mt. Gox warrants were issued due to alleged violations of the MLCA.

      The Government is already trying to sway public opinion on this matter by implying Bitcoin is is associated with child porn, drug dealing, prostitution, gambling, and any activity that the GB uses to influence public opinion.

      It is true the anonymity of Bitcoin may attract these types of organizations, but no more so than traditional bankers. Bitcoin is a threat to the income GB bankers currently derive from laundering their money.

      One sound bite that is being flaoted by the GB is "The crackdown on Liberty Reserve suggests that governments around the world won't tolerate the use of digital currencies for illicit purposes."

      The extradition proceedings of the guys seized in Spain and Russia, will be an indicator of where these countries stand on Bitcoins. The prosecution proceedings of those seized in the US will determine where the USD Courts stand on the Bitcoin issues as well as the Patriot Act.

      These proceedings will not kill Bitcoin. It will affect the value of Bitcoins. If these proceedings go in favor of the GB the value of Bitcoins will increase and force the Bitcoin traders to go underground.

      Because the US relations with the rest of the world have greatly diminished since 1944 and the Truman Administration, and the more recent behavior of the Bush Administration is a global sore spot, I am going to place my bet these Bitcoin guys will not be extradited.

      Because the GB has been eroding US citizens constitutional rights and have behaved outrageously in defiance of the US courts, those arresting in the US are likely to be freed.

      It's a Mad Mad Mad World.

      I understand I have only touched on certain subject and it will be difficult for many to be able to connect the dots and I will be perceived as a nut ball. I do not care. I wish I had the time to fill in the blanks and make the dots easier to connect. I do not. When I started this post my original intention was to write a one paragraph explanation of Bitcoins.
  • foreign country, foreign rules

    if they had a "presence" in America then US law reaches out and snags them. From the article is seems they only had a presence in Costa Rica, a sovereign country outside US law. It would seem either DoJ screwed up or the article left out an important bit of information.